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May 20, 2013

Matthews Asia Joins Frontier Rush

San Francisco-based Asia investment firm adds to its ‘distinct strategies’

It’s the belief that strategy matters that fuels the firm’s bottom-up stock picking, so questions surrounding hard and soft landings, stimulus from Beijing and other Sino-macroeconomic issues don’t seem to matter as much.

“We always encountering questions surrounding Chinese growth,” Lowe explains. “It’s a top-line view, and we’re more interested in looking at it company by company. We still see a lot of investment opportunities, especially surrounding wage and income growth in the middle class.”

This approach often leads them to underresearched small and midsize companies, as well as off-the-radar service industries, such as health care or tourism, which are still small but are expected to grow rapidly as consumer spending on services increases in Asia.

When asked about travel and time he spends in Asia, he notes a recent addition of the company outlook, called Asia Insight, was dedicated to this question.

“The piece was called ‘Kicking the Tires’ and it detailed the 2,000 meetings per year taken by company personnel,” he said. “Everyone travels, we are very much active in the region, and we understand the ecosystem and long-term opportunities. Each manager has autonomy over their own funds. We have 13 languages and 10 nationalities represented at the firm. We have depth in-house.”

Although they all travel, “in-house” means the entire investment team is based in San Francisco and not in Asia. It’s done intentionally, as investment decisions are made away from the “noise” of the markets and in collaboration with other members of the team.

Lowe added that his focus had “nothing in banks and we are benchmark agnostic. Benchmarks are backwards looking.”

A particular point of satisfaction, he says, is how rewarding it is to see advisors change their opinion on China, now making it a core strategy as part of the portfolio.

“Even though we have a bottom-up focus, we are cognizant of macroeconomic issues,” he notes. “We are very purposely set up to be generalists and can move across geographies. It feeds into our bottom-up strategy, but we feel it’s better to focus on quality companies that are run well.”

By doing so, he avoids some of the thornier issues that sometimes arise with local governments and officials, because the well-run companies are insulated from them.

The company recently increased its focus on frontier markets with the Matthews Emerging Asia Fund (MEASX), also released on April 30.

When asked which areas of the frontier space are exciting, fund manager Robert Harvey countered that “we have our own reasons to be excited,” and there is a wide disparity in the size of many markets that fall under the definition.

“There are two companies listed in Laos, and 720 companies that are listed in Vietnam,” Harvey said. “What’s interesting is that we’re seeing certain markets that are at the same point China was 20 years ago.”

As to whether or not a manufacturing giant like Indonesia could be considered a frontier or emerging market, and how often lines like that are blurred, Harvey says he sees little difference countries like Bangladesh and Sri Lanka.

“They currently have low income and wages per capita, and incredible room for growth.”

Commenting on the recent tragedy of the building collapse in Bangladesh and death of scores of garment workers, and how such news affects investment decisions, he noted that needed compliance and regulation will force an increase in wages, which will in turn force an increase in consumption, which will add to economic growth.

“A recent white paper from McKinsey & Co. predicts a 50% rise in manufacturing in just the three years between 2012 and 2015,” he concluded.

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